Federal budget 2013: Ottawa to crack down on CMHC

In its Budget 2013 document, Ottawa said it is implementing changes to limit the use of portfolio insurance — a controversial product that had caused CMHC to eat up part of its $600-billion limit on the mortgages it insures that are backed by Ottawa.

Anyone with less than a 20% downpayment and borrowing from a financial institution regulated by the Bank Act, must purchase mortgage default insurance.

Those with more than 20% do not have to buy that insurance but banks have been purchasing it on behalf of such clients because their loans were more easily securitized with federal government backing.

CMHC, which controls about three quarters of the market, is 100% backed by the federal government. Private players, Canada Guaranty and Genworth Financial, control the rest of the market and they are 90% backed by Ottawa. The private players have a $300-billion limit.

Ottawa is only on the hook for the money if a loan goes bad and the mortgage insurer is not solvent.

“Financial institutions significantly increased purchases of portfolio insurance during the financial crisis because the pool of insured mortgages were more easily used in bank funding vehicles,” according to the budget document.

Related

The new rules will “gradually limit” the issuance of low ratio mortgages to only those mortgages that are in the CMHC securitization program. Ottawa will prohibit the use of any taxpayer-backed insured mortgage, both high and low ratio, as collateral in securitization vehicles that are not sponsored by CMHC.

“These measures will restore taxpayer-backed portfolio insurance to its original purpose of allowing access for funding mortgage assets,” accordion to the budget document, which notes Ottawa will be discussing with industry how to implement the plan.